Merck, Abbott And JNJ Show Interest In Bausch & Lomb

By: Trefis

Posted: 1/14/2013 9:28:00 AM

Referenced Stocks: ABT;JNJ;MRK;PFE;RHHBY

This year could see a major healthcare M&A transaction as
Merck (
MRK
), Johnson & Johnson (
JNJ
) and Pfizer (
PFE
), are all rumored to be vying along with other healthcare
companies like Sanofi, to acquire private equity firm Warburg
Pincus' large eye-care business Bausch & Lomb (B&L). Abbott
Labs (
ABT
) is mulling to throw to bid too since it has appointed a big
investment bank to advise the company on the deal.

Many of these cash rich companies are are looking at inorganic
routes to fend off losses from patent cliffs or a weak drug
pipeline. While there are a number of healthcare companies in the
fray to acquire the company, we believe Merck and Abbott Labs could
emerge as one of the most serious contenders. However, a $10
billion price tag put up by Warburg, could be too steep for many of
the potential suitors.

B&L's core businesses revolve around vision care products
(contact lenses, lens care products etc) and ophthalmic surgical
devices and instruments. In addition, it has a number of generics
and branded drugs mainly for eyes that include steroid eye drops
Lotemax and Besivance to treat bacterial infections. In March 2012,
B&L acquired eye-drug company ISTA for $500 million, bringing
in the latter's current products including well known drop for
cataract surgery patients, Bromday. The deal also added several
pipeline drugs to its own, which currently has several promising
drugs including a drug to treat dry eye disease.

Vision care and pharmaceuticals, each account for about 40% of
B&L's total revenues, whereas the rest 20% comes from surgical
devices and instruments. Market wise, about 40% of total revenues
comes from North America, whereas Europe constitutes for 33% and
other regions bring in the rest.

The Serious Contenders

Pfizer
has been increasing its focus on its core pharmaceutical business
and recently sold its nutritional business. Pfizer is also
divesting its animal health business through an IPO. The rationale
is that pharmaceuticals offer better profit margins and the
divestment will leave more cash to repay debt, buyback stock and
invest in its research and development programs. While B&L has
some promising drugs in its portfolio, the majority of its revenues
still comes from vision-care devices and related products.
Therefore, we believe Pfizer might not be interested in buying the
whole company, and Warburg Pincus, which plans to sell B&L
intact to avoid potential increase in tax burden, wouldn't agree
otherwise.

JNJ
, which has been grappling with various recall issues in its OTC
and medical devices businesses, along with patent expiries in
pharma business, seems like a logical buyer. Its management has, at
many instances, signaled to expand its medical devices business
through inorganic routes. Further, long ago there were rumors of
JNJ taking interest in the lens care market. But, issue is with the
JNJ's significant presence in contact lens business. JNJ commands
more than 40% market share in the U.S. whereas B&L controls
about 10%. Market wise also, the deal won't help JNJ much
since B&L gets a significant chunk of its revenues from the
developed markets, and we expect JNJ to rather spend its money on
acquisitions in rapidly growing Chinese market. (Read
Johnson & Johnson's CEO Looks To Bolster Cardiology Devices
Segment Through Acquisitions
and
Johnson & Johnson Mulls Acquisition of Baby Product
Manufacturer in China
).

Abbott Labs
, through its is subsidiary Abbott Medical Optics, already has a
limited presence in vision-care business. However, the business has
been seeing dwindling sales. Abbott Labs had earlier unsuccessfully
tried to buy B&L in 2007, but lost to Warburg Pincus. By
acquiring B&L now, it could get ready access to its already
established medical devices products and boost its presence in the
market. While Abbott Labs wouldn't want to keep the branded pharma
business post its recent split from its separated proprietary
research company AbbVie. But AbbVie is significantly dependent on
Humira and a relatively weak pipeline continues to haunt it (Read
Abbott Labs Snapshot As AbbVie Begins Trading
). AbbVie could benefit from B&L's current drugs to reduce
dependence on Humira, while strengthening its pipeline.

In addition to Abbott,
Merck
, which has been facing a decline in revenues post Singuliar patent
expiry and couple of recent setbacks in its pipeline, could also
take a serious look at the opportunity. While the drug maker may
not have experience in B&L's core businesses, it has shown its
willingness to expand its own consumer healthcare franchise, in
stark contrast with its counterpart Pfizer. Merck's huge $17
billion in cash and cash equivalents at the end of Q3 also puts it
in comfortable position.

But, A $10 Billion Price Tag Is Not So Cheap

B&L had around $2.5 billion in revenues with about earnings
before interest, taxes, depreciation, and amortization (EBITDA) of
$400 million in 2007. With an estimated 6% improvement in EBITDA
margins since then and an expected $800 million of EBITDA in 2013,
estimated revenues for 2013 would be close to $3.5 billion. Thus, a
$10 billion price tag would be more than 2.5 times of its expected
2013 revenues, or about 12 times of its 2013 EBITDA. The big
question is if these healthcare companies would be ready to shell
out that much premium for a company whose overall growth may be in
tandem, with the expected market growth of mid-single digit (market
expected to jump by 17% to $35 billion by 2015)..